SUPPLY

definition: Supply means the quantity offered for sale by sellers at particular prices, during a certain

period of time.

First factor affecting price is demand. Second factor affecting price is supply.

The supply of a commodity is not the entire stock of it in existence. It is only that quantity that

is drawn into the market by the price ruling at the time. eg. the supply of crude oil is not the

estimated resources of all the world's oil field. It is the quantity that is drawn into the market by

the price ruling at the time.

Supply depends upon scarcity. Demand depends upon usefulness.

Supply price:

Price required to attract purchasers for any given amount of a commodity is called the demand price for

that amount at that time.

Price required to call for the effort necessary for producing any given amount of a commodity is called

the supply price for that amount during that time.

LAW OF SUPPLY

When the price of a good rises, and everything else remains the same, the quantity of the good supplied

will also rise.

Demand and supply

Price of a lunch Supply offered by restaurants Demand from consumers

Rs 12 0 250

Rs 15 30 200

Rs 25 60 140

Rs 35 60 60

Rs 45 90 50

Rs 65 120 40

Rs 80 150 20

Exceptions to law of supply:

1. In the labour market a rise in price (wages of labour) leads to fall in the amount of labour

supplied. When wage increases, labourers work fewer hours, to earn the same income as

before. So they may work less with a view to get some rest.

2. Under certain circumstances, supply is always fixed. An example is the pictures of a dead

painter. The supply curve is a vertical straight line.

Determinants of supply or Factors affecting supply

Quantity supplied (Qs) is the total amount of a good that sellers would choose to produce and sell under

given conditions. The given conditions include:

• Price

• If price rises -> production -> more profitable -> supply increases

• If price falls -> production -> less profitable -> supply decreases

• Cost of production

• Changes in

1) raw materials

2) wage rates

3) labour productivity

4) taxation

• Technical knowledge - progress of technology (eg. printer)

• Improves quality • Reduces cost • Better machines to produce fast • Computer – saves administration cost • e-mail – faster and better communication, etc

• Environment

• Agricultural commodities depends on

1) Monsoons

2) Flood

3) Drought

4) Natural calamities

• Level of income of producers

• Because the price of agricultural products increases cultivators consumes more of the

foodstuffs & send less to the market

• Firm’s behavior

• If profit maximum – objective

• Marginal revenue = marginal cost

• If sales maximum - objective

• Production increases & then supply increases

• Price of related goods • Substitute price will affect this

• Government policy • Policy and price subsidy. Eg: Fertilizers, sun control films, etc

• Weather conditions • Failure of monsoon

• Sweeping changes in technology • Plastic bags replaced by jute bags, Banana leaf.

We refer to all of these, with the exception of the price of the good, as determinants of supply.

Supply schedule:

Supply schedule for a commodity shows the relationship between its market price and the amount of

that commodity that all producers in the market are willing to produce and sell, other factors remains

the same.

Simply the construction of a list of prices at which a commodity can be supplied is known as

supply schedule.

Price Supply of bread (lakhs)

6 50

8 60

10 70

12 80

14 90

16 95

18 100

Supply schedule can be

(i) individual supply schedule,

(ii) Market supply schedule.

The former relates to the quantity that an individual firm or producer or supplier is willing and able to

offer for sale at different prices. The market supply refers to the sum total of the quantities of a

commodity offered for sale by different individual suppliers at different prices per unit of time. The

following schedule makes the point clear:

Price per kg S I S2 S3 S4 Total market supply

2.00 20 35 40 500

3.00 30 45 50 700

4.00 40 50 55 1000

5.00 45 55 60 1200

6.00 50 60 65 1500

Elasticity of supply:

The elasticity of supply means, the responsiveness of the supply of a commodity to the changes in price. The supply, like the demand, is a function of price. The law of supply expresses the price supply relationship. It is usually observed that the price and supply are directly related, which means that more is supplied at a high price and less at a low price. It may be noticed that though most of the commodities follow the law of supply, the degree of response varies from commodity to commodity. Some commodities are more responsive to a change in price, while certain others are less responsive. Accordingly, we come across commodities having more elastic supply and those having less elastic supply. The elasticity of supply can be expressed in the form of a formula as follows:

Price Elasticity of Supply (Es) = Change in Quantity Supplied

Change in Price

If the price of a machine rises from Rs 4000 per unit to Rs 4100 per unit and in response to this increase

in price, the quantity supplied rises from 5000 to 5500 units, calculate the elasticity of supply.

es = 500 x 4000 = 4 100 5000

The price of an article rises from Rs 400 to Rs 500 and the supply rises from 2000 to 3000. Calculate the

elasticity of supply.

es = 1000 x 400 = 2 100 2000

Various types of elasticity of supply can be mentioned: Under this method five different situations of Price Elasticity can be described as follows:-

1. Unitary Elastic supply or Es=1 In this situation the supply curve slopes upward in a straight line which starts from point of origin. This shows the percentage change in Quantity supply is exactly equals to percentage change in price.

2. Relatively elastic supply or Es ≥ 1 When a straight line upward sloping curve starts from Y-axis, then this is a case of Unitary Elasticity. This depicts that percentage change in quantity supplied is greater than percentage change in price.

3. Relatively inelastic supply or Es ≤ 1 When a straight line upward sloping curve starts from X-axis then this is a case of less than Unitary Elasticity. This represents that percentage change in quantity supplied is less than percentage change in price.

4. Perfectly Inelastic Supply or Es = 0 It is a situation where there is no change in supply regardless of change in price. It shows that supply remain unchanged with the change in price. In such situation supply curve is vertical straight line curve. Necessities are inelastic because we need them: water, food, shelter, etc.

5. Perfectly Elastic Supply or Es = ∞ In this situation supply is infinite corresponding to a particular price of the commodity. Accordingly a slightest fall in price caused an infinite change in supply, reducing it to zero. In this case supply curve is horizontal straight line. They can be luxuries, accessories, non-essential clothing, etc. If the price of iPads suddenly doubled, the demand would respond in the opposite manner and likely to an even greater degree.

Types of Elasticity of Supply

Coefficient of Elasticity of Supply

Verbal Description

Perfectly elastic supply infinite Sellers sell at the same price

Perfectly inelastic supply 0 Quantity supplied not changing as prices changed

Relatively elastic supply Greater than 1 Quantity supplied changing by a larger % than price

Relatively inelastic supply

Less than one Quantity supplied changing by a smaller % than price

Unitary elastic supply 1 Quantity supplied changing by the same % as price

COST Definition: Cost is defined as the amount of expenditure incurred on a given thing. Types:

1. Actual cost 2. Economics cost 3. Opportunity cost 4. Sunk costs 5. Fixed costs 6. Variable costs 7. Marginal cost 8. Incremental cost 9. Short – run costs 10. Long run costs 11. Historical and Replacement costs

Actual cost:

The amount spent for producing a product. This includes

wages

materials

transportation

salaries

power

Economics cost

includes the resources owned by the firm as well as those hired from outside

A) Explicit cost -> out-of-pocket costs ie) payment to outside the firm

B) Implicit costs -> book cost or non-cash costs refers to the payment

Opportunity cost

Cost of alternatives foregone. If we produce one commodity, we do not produce another.

eg. If we have an acre of land and produce potatoes, we get Rs 1000. If we have produced rice

we could have got Rs 2000.

Sunk costs

Costs of the past - forfeited

Fixed costs

Capital

Rent on leased buildings

Cost of plant

Equipments

Deprecation

Wages and salaries of permanent employees

Interest on borrowings

Variable costs

Cost of raw materials

Wages and salaries of the temporary employees

Costs of all other output that vary with output

Marginal cost

On account of producing an additional unit of the product

Incremental cost

Increasing the output by one or more units

Arise owing to

A)change in production line

B)introduction of new product

C)replacement of old technique of production

D)replacement of worn –out plant

Short – run costs

Costs within the given production capacity , the size of the firm remains the same

Long run costs

all costs including fixed assets like plant , building machinery etc become variable costs

Historical and Replacement costs

asset acquired in the past

replacing the same asset for future

Elements of cost

1. Material 2. Labour 3. Expense

Material cost

cost of commodities supplied to an undertaking

1. direct material cost 2. indirect material cost

direct material cost

A direct material is one which goes into a saleable product or its use is directly essential for the completion of the product.

eg. HSS bit for making a turning tool for a lathe. Fe, Ni, Cr etc for making alloy steel.

The amount spent on direct material is called direct material cost.

Indirect material cost

An indirect material is one which is necessary in the production process, but is not directly used in the product.

eg. cotton waste, greases, oils, sand paper.

The cost associated with indirect material is called indirect material cost.

Labour cost

1. direct labour cost 2. indirect labour cost

Direct labour cost

Cost of labour that is directly linked to the manufacture of the product. o wages o wages of a welder fabricating a structure

A direct labourer is one who converts the direct material to saleable product.

Indirect labour cost

Cost of labour that cannot be directly linked to the manufactured product. o maintenance men, helpers, machine setters, supervisors, foremen

Expenses

All charges, other than those incurred as direct result of labourers and materials

cost of services provided and cost of use of owned assets o Direct expenses o Indirect expenses

Direct expenses

Expenses which can be identified and allocated to cost centres or cost units o cost of design layouts, designs or drawings o hiring of special or single purpose machine tools or other equipment to complete a

particular production order

Indirect expenses

Expenses which cannot be allocated to a particular cost centres but can be apportioned or absorbed by the cost centres.

o rent of the building, insurance premium, telephone bills

fixed expenses o Those costs that remain constant irrespective of production volume

Taxes on land and building Depreciation arising from time rent

Variable expenses o Expenses that vary directly with the volume of production

Royalties paid on volume basis (number of CDs sold) Depreciation arising from use

Overheads

other names: indirect costs, overheads, on-cost, burden

All expenses other than direct expenses

overheads = cost of indirect material + indirect labour + indirect expenses

groups or subdivisions

o production or manufacturing overheads o administration overheads o selling overheads o distribution overhead o R&D overhead

Production and manufacturing overhead

includes all indirect expenses from the receipt of production order till its completion (ready for despatch to customer)

building expenses - rent, insurance, repair, heating and lighting, depreciation

indirect labour - supervisors and foremen, machine setters, general workers, maintenance men, shop clerk, shop inspectors etc

water, fuel and power (steam, gas, electric, pneumatic, hydraulic)

Consumable stores (cotton waste, grease etc)

Plant maintenance and depreciation

sundry expenses - employment office, security, welfare, recreation, rest room

Administration overheads

Consists of expenses in the direction, control, administration of an enterprise

Expenses of providing general management and clerical services.

office rent, salaries of clerks, director's & general manager's fees, insurance, legal costs, rates and taxes, postage and telephones, audit fees, bank charges

Selling overheads

Expenses in order to maintain and increase the volume of sales

Expenses direct or indirect necessary to persuade a consumer to buy

advertising, salaries and commission to sales manager, travellers, agents, rent of sales rooms and offices, consumer service, service after sales

Distribution overhead

Expenses for transporting the products to customers and storing them when necessary.

warehouse charges, Cost of transporting goods to warehouses, loading and unloading charges, upkeep and running of delivery vehicles, salaries of clerks and labourers, depreciation.

Research and Development overheads

depends on the size of R&D department

Prime Cost

Prime cost = Direct Material cost

+ Direct labour cost

+ (variable) direct expenses

Works or Factory cost

Factory cost = prime cost + factory overheads

= Direct Material cost

+ Direct labour cost

+ (variable) direct expenses

+ factory overheads

Total cost = Factory cost

+ selling overhead

+ distribution overhead

+ administration overhead

Selling price = Total cost ± profit or loss

Objectives of good costing system: 1. To ascertain the cost of production of every unit, job, operation process, department and

service. 2. Indicate to management any inefficiency and the extent of waste (material, time, expense, use

of machine, equipment and tools) 3. Disclose profitable and unprofitable activities. This can help to take steps to eliminate or reduce

these activities, change the method of production to make them more profitable. 4. Provides actual figures of cost for comparison with estimates. This provides the management in

their price fixing policies. 5. It provides cost data for different periods, volumes of production. This helps the management in

budgetary control. 6. It records and reports to the manager how the actual cost compares with standard cost. 7. Indicates the exact cause of increase or decrease in profit or loss. 8. It provides data for comparing the costs within the firm and between similar firms. From the following data find a) material cost b) Prime cost c) direct cost d) Factory cost e) Administrative overheads f) cost of production g) selling and distribution overheads h) total cost and cost of sales i) selling price. Assume a net profit of Rs 10000.

No Description Rs

1 Material on hand (Apr 1, 1975) 60000

2 New material purchased 250000

3 Directors fees 3500

4 Advertising etc 12000

5 Depreciation on sales department car 1200

6 Printing and stationary charges 300

7 Plant depreciation 5000

8 Wages of direct workers 70000

9 Wages of indirect (factory) workers 10000

10 Rent of factory building 5000

11 Postage, telephone and telegraph 200

12 Water and electricity for factory 1000

13 Office salaries 2000

14 Rent of the office 500

15 Rent of the show room 1500

16 Commission of salesmen 2500

17 Sales department car expenses 1500

18 Material on hand (Mar 31, 1976) 50000

19 Variable direct expenses 750

20 Plant repair and maintenance 3000

21 Heating, lighting and water for office use 2500

22 Cost of distributing goods 2000

(a) material cost = Cost of material on hand on Apr 1, 1975

- Cost of material on hand on Mar 31, 1976 + Cost of new material purchased

= 60000 -50000 + 250000 = Rs 260000 (b) Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 260000 + 70000 + 750 = Rs 330750 (c) Direct cost = same as prime cost (d) Factory cost = Prime cost + factory or production overhead (sum of 7, 9,10,12 & 20) = 330750 + 5000 + 10000 + 5000 + 1000 + 3000 = Rs 354750 (e) Administrative overheads

= sum of 3, 6, 11, 13, 14 & 21 = 3500 + 300 + 200 + 2000 + 500 + 2500 = Rs 9000 (f) Cost of production = Factory cost + Administrative overheads = 354750 + 9000 = Rs 363750 (g) Selling and distribution overheads = sum of 4, 5, 15, 16, 17 & 22 = 12000 + 1200 + 1500 + 2500 + 1500 + 2000

= Rs 20700 (h) Total cost or cost of sales = Cost of production

+ Selling and distribution overheads = 363750 + 20700 = Rs 384450 (i) Selling price = Cost of sales + Profit = 384450 + 10000 = Rs 394450 A factory producing 150 electric bulbs a day, involves direct material cost of Rs 250, direct labour cost of Rs 200 and factory overheads of Rs 225. Assuming a profit of 10% of the selling price and selling on cost (overheads) 30% of the factory cost, calculate the selling price of 1 electric bulb. Factory cost = direct material cost + direct labour cost + factory overheads = 250 + 200 + 225 = Rs 675 total cost = factory cost + selling overhead = 675 + 675 x 30/100 = Rs 877.50 total cost = selling price - profit = sp - sp x 10/100 877.50 = sp - sp x 10/100 SP = Rs 975 Selling price of 1 bulb = 975/150 = Rs 6.50 A cast iron foundry employs 30 persons. It consumes material worth Rs 25000, pays workers at the rate of Rs 10 per hour and incurs total overhead of Rs 10000. In a particular month (25 days) workers had an overtime of 150 hours and were paid at double the normal rate. Find i) the total cost and ii) the man hour rate of overheads. Assume an 8 hour working day. i) Total cost Labour cost = (number of working hours per month) x (rate of payment per hour) = (25x8x30)x(10) = Rs 60000 Overtime expenses = Rs 150x20 = Rs 3000 Total labour cost = Rs 60000 + 3000 = Rs 63000. Prime cost = direct material cost + direct labour cost + (variable) direct expenses = Rs 25000 + Rs 63000 = Rs 88000 Factory cost = prime cost + factory overheads

Total cost = Factory cost + selling overhead + distribution overhead + administration

overhead

= prime cost + total overheads

= Rs 88000 + Rs 10000

= Rs 98000

ii) Man hour rate of overhead = Total overhead Number of total man hours put = Total overhead regular man hours + overtime man hours = Rs 10000 / (25x8x30 + 150) = Rs 1.627

Two molders can cast 25 gears in a day. Each gear weighs 3 Kg and the gear material costs Rs 12.50 per Kg. If the overhead expenses are 150% of direct labour cost and two molders are paid Rs 70 per day, calculate the cost of producing one gear.

Total cost = Material cost + labour cost + overheads

= (25x3x12.5) + (70) + (70x150/100)

= Rs 1112.50

Cost per gear = Total cost No. of gears

= 1112.50/25

= Rs 44.50

Calculate the selling price of one fountain pen from data given below:

No. of fountain pens produced 135

Labour cost Rs 200

Material cost Rs 160

Factory overheads 35 % of prime cost

Administration and selling overheads 20 % of factory cost

Profit 10 % of total cost

Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses

= 160 + 200 = Rs 360 Factory cost = Prime Cost + factory overheads = 360 + 360x35/100 = Rs 486 Total Cost = Factory cost + selling overhead + distribution overhead + administration overhead = 486 + 486x20/100 = Rs 583.20 Selling price of 135 pens = Total cost + profit = 583.20 + 583.20x10/100 = Rs 641.52 Selling price of one pen = Selling price of 135 pens 135 = 641.52/135 = Rs 4.75 A drill press costs Rs 6000. A discount of 25% of this price is given to the distributor. If labour cost, material cost and factory overheads are as 4:1:2; and selling expenses are 25% of the factory cost, calculate the profit of the factory for one drill press. Assume factory overheads of Rs 800. labour cost : material cost : factory overhead = 4:1:2 factory overhead = Rs 800 Let labour cost + material cost + factory overhead = P factory overhead = Rs 800 = (2/7) P P = 800x(7/2) = 2800 material cost = (1/7)xP = (1/7)x2800 = Rs 400 labour cost = (4/7)xP = (4/7)x2800 = Rs 1600 Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 400 + 1600 = Rs 2000 Factory cost = Prime Cost + factory overheads = 2000 + 800 = Rs 2800 Total Cost = Factory cost + selling overhead + distribution overhead + administration overhead = 2800 + 2800x25/100 = Rs 3500 Selling price = Cost of press - discount = 6000 - 6000x25/100 = Rs 4500 Selling Price = Total cost + profit 4500 = 3500 + Profit Profit = Rs 1000 A factory is making a pipe fitting by (a) casting and (b) forging. The cost data is as follows:

Description Casting Forging

Material cost per piece Rs 2 Rs 2

Labour rate Re 0.80 per hour Re 0.80 per hour

Time required to make one fitting 3 hours 48 minutes

Overheads 25% of labour cost 150% of labour cost

Calculate & compare the total cost of each pipe fitting in the two cases. Casting: Labour cost = (Labour rate) x (Time required to make one fitting) = 0.80x3 = Rs 2.40 Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 2 + 2.40 = Rs 4.40 Total cost = Prime cost + overheads = 4.4 + (2.40x25/100) = Rs 5 per piece Forging: Labour cost = (Labour rate) x (Time required to make one fitting) = 0.80x48/60 = Rs 0.64 Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 2 + 0.64 = Rs 2.64 Total cost = Prime cost + overheads = 2.64 + (0.64x150/100) = Rs 3.60 per piece Hence forging is economical when compared to casting for making a pipe fitting Ascertain the prime cost, work cost, cost of production and total cost and profit from the following information:

Description Rs

Direct material 7000

Direct labour 2800

Factory expenses 2600

Administrative expenses 1000

Selling expenses 900

Sales 20000

Prime cost = Direct material + direct labour = 7000 + 2800 = Rs 9800 Work cost = Prime cost + factory expenses = 9800 + 2600 = Rs 12400 Cost of production = Work cost + Administrative expenses = 12400 + 1000 = Rs 13400

Total cost = Cost of production + Selling expenses = 13400 + 900 = Rs 14300 Profit = Sales - Total cost = 20000 - 14300 = Rs 5700